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The Debt and the Ceiling



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One thing we can say for sure about the coming debate over the debt ceiling is that at the end of it the debt ceiling will be raised. Deficit spending, let alone our massive accumulated debt, is not going away anytime soon, and that means continued borrowing. The question at the heart of that debate is not whether the ceiling will be raised but whether, in the process, the trajectory of our debt will be lowered so that we at least limit the degree to which we’re falling further into debt all the time. The president’s answer is no, and the Republicans are trying for yes.

In justifying his intransigent opposition to using a debt ceiling increase as an opportunity to reduce future deficits and debt, the president has insisted that negotiating over the debt limit (as he and other recent presidents have done in the past) would be bad for America’s standing and credit rating. Even raising the prospect of using this debate to get our government finances into better shape is taken to be dangerous. As it happens, the credit rating agencies don’t seem to agree.

As the Wall Street Journal reported Tuesday night, Fitch, one of the major rating agencies, came out with a warning to policymakers this week about the prospects for a downgrade of the federal government’s debt (which Fitch now rates as Triple-A). Most of the news around that warning had to do with Fitch’s statement that, as the Journal put it (citing David Riley, head of Fitch’s sovereign-rating team), “also inconsistent with a triple-A rating, Mr. Riley said, is if lawmakers staring down the debt ceiling limit choose to make debt payments while skipping out—even temporarily—on Social Security payments or other government obligations.” Thus, it seems that the prioritization of payments would be taken to indicate dysfunction and therefore risk. But what’s that “also” about? What was the first thing Fitch said would be inconsistent with a top rating? It was this, according to the Journal:

Fitch said Tuesday that it may downgrade the nation’s debt even if lawmakers raise the debt ceiling, if Washington emerges from those negotiations without taking steps to lighten the U.S. debt load.

In other words, Fitch warned that it would look to downgrade our credit if the outcome of the debt-ceiling talks was the president’s preferred outcome of a “clean” debt-ceiling increase, without any deficit reduction. That outcome is to be avoided. The trouble is that, given the president’s apparent intransigence, getting some progress on debt reduction would seem to require some means of using the debt-ceiling increase itself as a bargaining chip.#more#

To make sure that this does not involve using a default as a bargaining chip, some Republicans have proposed various prioritization bills, which, if the government reached the debt ceiling, would require the Treasury to use available revenue to fund debt service first, then some other key obligations like benefit payments and military salaries, and only then other spending. One danger of that approach, as Fitch suggests, is that it treats debt repayment as one federal expense among many — to be paid only because Congress has decided to give it a high priority in this instance. That’s why the president is able to talk about the debt ceiling as having to do with paying bills for past spending while implying it has nothing to do with racking up bills in the future.

For that reason, I think the proposal made by NRO’s editors this week makes a lot of sense. They propose that Republicans begin the debt-ceiling debate by moving to legally redefine the debt ceiling itself. Under this new definition, once the ceiling is hit, the Treasury could continue to borrow only for ongoing debt service—that is, paying interest on the debt and rolling over existing debt — but not for any other federal spending, which would have to be funded by available revenue until the debt ceiling was raised. This would formally separate paying the nation’s debt from blindly continuing to spend money we don’t have — the two things the president is desperately trying to confound and muddle in his debt-ceiling rhetoric. This approach could be difficult for the Democrats to reject, since the alternative is keeping default on the table or giving the president a super-constitutional unlimited borrowing and spending power, neither of which would be popular. It would put the prospect of default off the table permanently, not only in this debt-ceiling debate but in any future ones. And it would improve the chances that the necessity of raising the debt ceiling would serve as a reminder to Washington of the necessity of reducing our deficits and debt.

If this approach did not succeed in clearing the way for some modest spending reductions and we still did hit the debt ceiling, then other federal spending would have to be prioritized. That would be something like a partial government shutdown — a lesser version of where a budget debate gone wrong would end up. That outcome would be unfortunate — it would result from a failure of this strategy, not its success, and the prospect of it would make for a powerful reason to agree on some deficit reduction before hitting the ceiling. But by leaving debt repayment unaffected, this approach would both allow more ongoing revenue to be available for those prioritized expenses if the debt ceiling were reached and make clear that the credit of the United States need never be an issue, even if the federal government’s ability to get control of its deficit spending remains in question. That’s one key benefit of this idea over just prioritizing payments after the debt ceiling is reached. It would lower the stakes of the debt-ceiling fight, and thereby actually make a constructive outcome—an orderly increase in the debt ceiling combined with a decrease in our future debt — more likely.

As the editors note, the possibility of default, however unlikely and implausible it is, does not give Republicans leverage. It gives the president leverage. It enables him to ignore runaway spending by raising the specter of an even worse problem. By taking away that weapon, Republicans could not only better secure the government’s credit rating; they could better their chances of securing its fiscal future by reducing spending in this round of our budget debate and in future ones.

Nobody wants to hit the debt ceiling. The question is how can we raise it while doing something about the reason that it has had to get so high to begin with. The president wants to hide and ignore that question, while Republicans want to acknowledge and answer it. If that were clear, there should be no doubt about which party is pursuing the responsible course. The president has done his best to make sure that doesn’t become too clear to the public. But the kind of redefinition of the debt ceiling proposed by the editors, alongside a bill proposing an increase in the debt ceiling and a decrease in spending, would make for a very strong opening move for House Republicans in their effort to clarify the problem we face and to begin to address it.



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